2/22/20
Statistical
Summary
Current Economic Forecast
2019 estimates (revised)
Real Growth in Gross Domestic Product 1.5-2.5%
Inflation +1.5-2%
Corporate Profits 6-9%
2020
Real Growth in Gross Domestic Product 1.5-2.5%
Inflation +1.5-2.5%
Corporate Profits 5-6%
Current Market Forecast
Dow Jones Industrial Average
Current Trend (revised):
Short Term Uptrend 24905-37367
Intermediate Term Uptrend 16100-32301
Long Term Uptrend 6860-38078
2019 Year End Fair Value
14500-14700
2020 Year End Fair Value
15100-15300
Standard & Poor’s 500
Current
Trend (revised):
Short Term Uptrend 3102-3597
Intermediate
Term Uptrend 2744-4244 Long Term Uptrend 1329-4964
2019 Year End Fair Value 1790-1810
2020 Year End Fair Value 1870-1890
Percentage
Cash in Our Portfolios
Dividend Growth Portfolio 56%
High Yield Portfolio 55%
Aggressive Growth Portfolio 56%
Economics/Politics
With the signing of the US/China and USMCA
trade treaties, the Trump economy is a slight positive for equity valuations.
The total dataflow this week was negative
again; but the primary indicators (three) were all upbeat. I am calling it a positive. Score: in the last 229 weeks, seventy-six
were positive, one hundred and three negative and fifty neutral.
The erratic pattern in the numbers
persists. It seems likely that the
signing of the two trade treaties would have had a positive influence of business/consumer
psychology which would in turn increase
the willingness to invest and spend. But
if the result is simply that the economy continues to struggle to grow, that is
probably not going to be much help when the impact of the coronavirus becomes
manifest.
Of course, nobody has a clue as to the effect
that the virus will have on global growth. We do know that China lowered the
reported infection and death growth rates this week; but we don’t know how much
of that is bulls**t. We know that Japan
and South Korea have seen a pickup in infections/deaths; but those numbers are
relatively small, at least for the moment.
In short, we don’t know diddily about the ultimate economic outcome of
the coronavirus. As you know my conclusion
is that this virus will have a temporary effect on global growth but that dissipate
over time. For the moment, I am not altering my longer term view that the
coronavirus will not impact secular economic growth; but I got
there by the WAG [wild ass guess] method.
Hence, I am also not altering my long term
economic outlook, which is that the economy will continue to grow at a subpar
rate due to the twin burdens of egregiously irresponsible fiscal and monetary
policies.
Overseas data was slightly negative. My concern is that it will only get worse as
the influence of the coronavirus works its way into the numbers. But as
of the end of this week, the global economy is supportive of US economic
growth.
Bottom line:
on a secular basis, the US economy is growing at an historically below
average rate. The driving causes behind my below average growth outlook are totally
irresponsible fiscal (running monstrous deficits at full employment adding to
too much debt) and monetary (pushing liquidity into the financial system that
has done little to help the economy but has led to the gross mispricing and misallocation
of assets) policies.
Cyclically, the US economy continues to limp
along. However, short term the
coronavirus will almost surely have a negative impact on global economy growth. The questions are (1) are what are the stats going to look like
when the impact of the coronavirus becomes manifest? At the minimum, it would seem reasonable to
assume that there will be a period of weak numbers, and (2) how long will that
effect last? My assumption is that any
decline/slowdown in economic activity will be short lived. In other words, it will almost surely
influence 2020 growth estimates but the impact will dissipate through the year.
The
Market-Disciplined Investing
Technical
The Averages (28992,
3337) got whacked yesterday. The good
news was that the S&P held above its former all-time high. The bad news is that the rest of the indicators
that I follow are pointing at a need for safety.
GLD, TLT and UUP maintained
their strong move as safety trades and they all are either making or about to
make new highs. I think this is
potentially ominous signal. Though it is
too soon to act. They need to
successfully challenge those boundaries; and the S&P needs to start busting
through some support levels before we can be sure that this is not a head fake
(i.e. that economic outlook is about to turn negative).
There remains an
apparent dichotomy between the economic expectations of equity investors and
those in GLD, TLT, and UUP. Somebody is
going to be wrong.
Friday
in the charts.
Fundamental-A
Dividend Growth Investment Strategy
The DJIA and the S&P are well above ‘Fair
Value’ (as calculated by our Valuation Model).
At the moment, the important factors bearing on Fair Value (corporate
profitability and the rate at which it is discounted) are:
(1)
the extent to which the economy is growing. My forecast remains that the economy continues
to struggle forward against multiple headwinds.
Though the signing of the
US/China and USMCA trade agreements reinforces my conviction that it will bolster
the secular growth rate of the economy. That should keep secular corporate
profit growth on a somewhat even keel which is a plus for stock prices.
On the other hand, the coronavirus epidemic
will almost surely have a negative effect on short/intermediate term economic growth. That said, exogenous events with a short
shelf life rarely have a lasting influence on long term equity valuations. Furthermore, as long as the Fed and its fellow central
banks continue to pump money into the financial system, the Market impact should
be contained,
(2)
the resumption of QE by the global central banks. In an attempt to offset the economic impact
of the coronavirus, the Bank of China continued to shovel liquidity into the
Chinese financial system with both hands.
As long as that remains the case AND
investors believe that it is a plus for the Market, stock prices should
maintain their upward bias irrespective of valuations.
That said, I believe that QEInfinity has, is and will
continue to create distortions in pricing of risk which, in turn, leads to the
mispricing and misallocation of assets.
As such, it is a negative for the efficient growth of the economy.
Nonetheless, on a short term basis, QE,
QEInfinity and NotQE have been and remain Market friendly. Meaning stocks should continue to do well
until the Fed either reverses its policy or investors figure out just how punitive
that policy has been for the economy.
Whether or not the changes occurring in the
technical landscape are a sign of that occurring remains to be seen. But clearly, they need to be watched closely.
Bottom line: I believe that Averages are grossly overvalued
[as determined by my Valuation Model]---which will continue to count for little
as long as the global central banks are pumping liquidity into the financial
system.
As prices continue to rise, I will be primarily focused on those stocks
that trade into their Sell Half Range or fail to meet the minimum financial
quality criteria for inclusion in our Universes and act accordingly. Despite
the Averages being near all-time highs, there are certain segments of the
economy/Market that have been punished severely (e.g. health care) with the
stocks of the companies serving those industries down 30-70%. I am compiling a list of potential Buy
candidates that can be bought on any correction in the Market; even a minor
one. As you know, I recently added
AbbVie to the Dividend Growth and High Yield Buy Lists and Kroger to the
Dividend Growth Buy List.
As a reminder, my Portfolio’s cash position
didn’t reach its current level as a result of the Valuation Models estimate of
Fair Value for the Averages. Rather I
apply it to each stock in my Portfolio and when a stock reaches its Sell Half
Range (overvalued), I reduce the size of that holding. That forces me to recognize a portion of the
profit of a successful investment and, just as important, build a reserve to
buy stocks cheaply when the inevitable decline occurs.
